Size helped in 2014 when it came to public IP licensing company stock performance, but it did not assure success.

As a group, the twelve companies in the PIPX Public IP Performance Index out-paced the S&P 500 for the 4Q 2014 9.1% to 4.4%, with Neonode, Tessera and InterDigital leading the way, all with 4Q gains in excess of 30%. Marathon, under $100M in market cap for most of 2014 and not represented on the graph below, was up 17% for the quarter and 167% for the year.

For the year 2014, however, companies in the index fare much worse, with PIPX companies generating a collective return of just 4.3% vs. 11.4% for the S&P 500. Tessera and InterDigital were notable performers each with 40% returns for the year. Rambus and Acacia were up about 17% each.

Eight of the twelve companies in the PIPX, which is provided to IP CloseUp by Dr. Kevin Klein of Freescale Semiconductor, were down, led by ParkerVision, VirnetX and Vringo.RPX was down 18.5% for the year and WiLAN 11.3%.

The PIPX is weighted by value or market capitalization, so poor performance by smaller companies has less of an overall impact on index performance.

Conclusions?

It is difficult to draw too many conclusions from this, the first year of the PIPX. Investors tended to reward higher value stocks, but size was not a guarantee of performance, with RPX and others down against both the index and S&P 500.

It’s important to recognize that despite uncharacteristic pressure on patent values due to legislative reform and judicial decisions, good assets have continued to hold value. With the recent Rockstar settlements and sale of 4,000 patents to RPX, we could be at or near the pricing bottom, depending on the nature of 2015 patent reform.

A few small stocks bucked the trend, notably Marathon (MARA), which was not on the PIPX list because it was under $100M in market cap for most of the year. It is now at $110M and is being added. MARA ended the year up 167%. I’m pleased to say that Brody Berman Associates, my firm, helped to develop with the company’s early messaging.

Other companies not in the index performed poorly and their results can be readily tracked on he IP CloseUp 30 found here. (Paste the URL onto you home screen or desktop for easy, real-time monitoring of the public IP sector.)

With three recent Markman hearings and more than $100M in cash UPIP trading currently at $1.46 could be a good buy for those with patience and a strong stomach.

At an earnings call last Thursday Unwired Planet, Inc. (NASDAQ: UPIP) CEO Philip Vachon reiterated his confidence in the future, and announced a renegotiated deal with Ericsson that will provide the company more flexibility going forward regarding patent transactions.

“With the modification of the Ericsson agreement during the [past] quarter, the company now has the option to acquire assets that are not subject to the Ericsson revenue share agreement,” Vachon told investors,”but that are subject to the $1.7 million of our NOL.”

Sum of Parts Valuation – “Given the nature of its business model and the lack of revenue and operating profit predictability from a modeling perspective,” says Argento,” “we believe valuing UPIP on a project/IP portfolio sum of parts valuation basis is most appropriate. We take various scenarios: Low, Mid, and High range of outcomes for monetizing both its core UPIP portfolio and the wireless infrastructure portfolio acquired from Ericsson.”

Argento’s list of “Valuation” challenges and “Risks” in his report (linked above) provide useful guidance for anyone interested in public IP licensing sector.

Spend and Wait

Unwired Planet is typical of the frustrations faced by many PIPCOs that own good patents but have to spend time and money, and encounter risk, to monetize them.

Spending on legal fees and acquisition costs, without generating significant income, requires a strong constitution, even when there is cash on the balance sheet and burn rate that can be contained. Not every PIPCO is so lucky.

Google’s successful CAFC appeal has vacated Vringo’s already reduced $30M award. Could it have quit while it was ahead?

Vringo stock traded as high as $5.45 in 2013 and as low as $.67 a few days ago. It lost 80% of its value in a matter of hours when its big win was overturned by the Court of Appeals. Since then it has regained about 20% of its value. While the company’s dreams of a $1B+ payout appear to have been dashed, its future for some recent shareholders may not.

IP CloseUp readers will recall that back in February, when VRNG’s shares were touching $5, I reminded them that a big win was not certain (here).

Fresh off of a patent victory on Google’s AdWords in 2012 Vringo (NASDAQ: VRNG) was looking toward a record payout and a share price of $10 or higher. But something happened on the way to the party. On August 15 Vringo received news that it had lost an appeal filed by Google that sent the stock into a tailspin.

Business Model or Model Business?

The sudden, dramatic decline in VRNG shares begs a few questions: (1) Did Vringo over-emphasize the importance of the single victory? (2) Is its business model dependent on a big win and there is little else for investors to? (3) Does it simply not care about spikes in its share price?

Loosing cases is a fact of NPE life. In the post American Invents Act (AIA) environment, NPEs must achieve a pipeline of quality patents, licenses and disputes to endure. A “portfolio” of risk, if you will. While NPEs may lose more today than in the past — and win less big — the economics of patent enforcement are still viable for those with quality, capital and patience. Public ownership adds pressure to patent licensing companies, and may appeal more to short sellers than value investors. Shorts lose less than investors do.

Vringo won $30M from a jury verdict in 2012, less than the $493M verdict it had sought. The judge overseeing the case ordered Google to pay a running royalty amounting to 1.36 percent of US AdWords sales. Those additional payments could have been more than $200 million annually. Instead, Google appealed.

Was Vringo right to push the litigation envelope or should it (could it?) have taken the money and run?

“Vringo once had a small ‘video ringtone’ business,” writes Joe Mullin in Ars Technica, “but today its value is in its patents. It purchased foundational patents from Lycos, an early search engine, and put them in a holding company it calls I/P Engine.”

Mullin continues: “The result will resonate beyond Vringo’s case. By dismantling two patents from a once-famed search engine on this basis, the majority has sent a message that more Federal Circuit judges are willing to invalidate patents following the results of this year’s most important Supreme Court patent case, Alice v. CLS Bank. That opinion, which was cited in a concurring opinion, said that obvious ideas—especially ones that don’t amount to more than an idea surrounded with computer jargon—shouldn’t get patents.”

The Supreme Court has embarked upon a slippery slope, providing even less clarity about what computer coded inventions are indeed novel and non-obvious.

Request for En Banc Review

Vringo plans to filea petition for an en banc review of the adverse federal appeals court ruling it received last week for its infringement suit against Google, AOL, IAC Search and Media, Gannett Company and Target. Those are not often heard. If the appeal is granted expect the stock to jump. If the appeal is heard, Google may think it prudent to settle, maybe not, given Alice v. CLS Bank.

Vringo (NASDAQ:VRNG) Director Noel Joseph Spiegel acquired 30,000 shares of Vringo stock on the open market in a transaction dated Friday, August 15th. The shares were purchased at an average cost of $0.89 per share, for a total transaction of $26,700.00. Following the completion of the transaction, the director now directly owns 50,000 shares of the company’s stock, valued at approximately $44,500. The purchase was disclosed in a legal filing with the Securities & Exchange Commission, which is available at this link.

Shares of Vringo opened at 1.40 on Wednesday. Vringo has a 1-year low of $0.67 and a 1-year high of $5.45. According to WKRB News and Analysis, “Vringo also was the target of unusually large options trading activity on Monday. Traders bought 7,610 call options on the stock. This represents an increase of approximately 419% compared to the typical volume of 1,465 call options.”

“Vringo also sued Microsoft over its Bing search engine in January 2013,” reports Ars Technica. “Microsoft quickly settled the suit, giving Vringo six additional patents, and agreed to pay Vringo $1 million plus five percent of whatever was won from Google. That final payment now looks like it will be five percent of nothing.”

Despite their increased size and capital most small public companies that rely significantly on patent licensing have yet to prove they can compete with other equity investments.

A recent report by, “PIPX Intellectual Property Sector Index,” from Dr. Kevin Klein of Freescale Semiconductors, a provider of embedded procession solutions, shows that the stock of most PIPCOs have under-performed the benchmark S&P 50 equity index over the past 11 quarters.

(For a more in-depth analysis see “Let the Shake-Out Begin” in the July IAM magazine, out this month. My piece can be found under The Intangible Investor (for subscribers), here.For a comparative listing of public IP companies, including news and performance data, visit the IP CloseUp 30,here.)

The PIPX IP Sector Index is designed to provide a measure of the general health of the PIPCO sector by comparing the relative value of key companies over time.

PIPX IP Sector Companies

Market Cap(5/1/14)

Acacia Research (ACTG)

775M

InterDigital (IDCC)

1.40B

Neonode (NEON)

203M

Parkervision (PRKR)

439M

Pendrell (PCO)

429M

Rambus (RMBS)

1.37B

RPX (RPXC)

866M

Tessera (TSRA)

1.16B

Unwired Planet (UPIP)

250M

Vringo (VRNG)

351M

VirnetX (VHC)

807M

Wi‐LAN (WILN)

371M

Bigger Question

The bigger question is how many IP monetization models do we need, and which ones are best adapted for long-term success?

As much as half of the 30 or so public IP licensing companies are likely to merge, be taken private or otherwise disappear over the next few years. That’s bad news for some investors, good for others.

Says Dr. Klein: “The lower returns and higher volatility of the PIPX as compared to the broad market imply that there are challenges facing investment in intellectual property licensing as the business evolves and matures.

“This of course could be due to short-term factors over the 33 months the PIPX Index is tracked, such as a deflating patent bubble. However, it may also be a sign that there are some underlying characteristics of this business that may need to be addressed or better understood to help make intellectual property licensing a more comfortable investment for the broader market.”

The value of companies in the IP space like Tessera and Rambus increased, while Acacia and RPX declined (see below).

Other sessions at this year’s IPBC include: Cooperative Patent Purchasing, Building a World-Class Corporate IP Function, NPEs Under Attack, Deal Dynamics, Beyond Monetization, and The Next Battle Grounds.

More than 600 are expected to attend from the U.S., Europe and Asia, with more than 80 speakers. The IP Hall of Fame also will induct four new members at a gala reception on June 23 held at the Krasnapolsky Hotel.

The emerging public IP company space took an an unexpectedly positive turn last week.

Rockstar Consortium, with a portfolio of more than 4,000 communications patents, has struck a deal with a tiny public patent monetization company, Spherix (SPEX), that is certain to increase the already growing interest in public IP-centric companies, or PIPCOs.

Spherix, with a market cap of only $5M, said in an announcement that it has entered into a deal with Rockstar, one of the world’s leading patent holders, to acquire a suite of patents. The announcement did not specify the patents being acquired, or the number, nor did it disclose the terms of the transaction. The press release did state that Rockstar has agreed to become a shareholder in Spherix, and that Spherix intends to bring its first enforcement action on the Rockstar portfolio within 30-60 days.

Rockstar has said that it has been actively licensing its portfolio, but, to date, has not filed any suits. It could be using Spherix as a privateer, or third-party, to do its nasty bidding. However, a successful patent monetization executive close to IP CloseUp told me that would be unlikely, “because without shell companies obscuring ownership, as some patent holders have been known to do, the source of the IP rights in this case is fairly clear.” Rockstar may be merely testing the waters to see how public ownership will affect its portfolio value and licensing potential, and if access to the capital markets can make a difference.

IP CloseUp readers will recall that Rockstar bought most of the patent portfolio from bankrupt Canadian telecom company Nortel for $4.5 billion in 2011. The transaction constitutes what is probably the most expensive patent acquisition ever. The genesis of it was thought to be a collective move against technology rival and Android champion Google. Rockstar is owned by Apple, Microsoft, Ericsson, Blackberry, Sony and EMC.

It’s important to remember that Apple, with a $2.6 billion investment, owns some 58% of Rockstar and, presumably, had some input in the Spherix deal. There may be something on Apple’s agenda that makes the Spherix deal particularly attractive. Time will tell us if this is in fact the case. A few weeks ago in IP CloseUp I wrote about an IEEE Spectrum story that showed how Apple was involved in acquiring aMitisubishi-originated patent that was eventually turned over to an NPE, presumably more for competitive leverage than cash.

The IAM blog wrote that “On the face of it, then, what we have here is a classic privateering arrangement; but it is possible there is more to it than that. As a Spherix shareholder it is not only assertions of its own patents that Rockstar will benefit from, but also of other portfolios Spherix owns and may acquire in the future.”

IAM also reported that Anthony Hayes is expected to become CEO next month. Previously a partner at law firm Nelson Mullins Riley & Scarborough, Hayes “was one of the people behind JaNSOME IP Management, a New York-based IP advisory and monetization outfit launching a $30 fund that would invest ‘in global opportunities in the patent market’. Whether his move to Spherix is fund-related, or whether Hayes has cut his links with JaNSOME is not clear.”

Spherix announced a restructuring in December 2012 when it effectively became an IP monetization company. In Seeking Alpha, Adam Gill reports that “[Spherix] had no patents to speak of before this Rockstar deal, but its wholly owned subsidiary Nuta is about to merge with North-South Holdings, which brings $2 million in cash and a portfolio of 222 patents acquired from Harris Corporation (HRS), another company known to have a robust patent portfolio.” Details on that deal can be found here.

* * *

It will be interesting to see if other large patent holders, including operating companies, will seek to test the patent licensing market the via the public equity one.

There is nothing to stop a public company that owns IP rights from taking an equity position in another one, putting it in a better position to monetize its IP rights. In fact, this may be a more efficient and financially rewarding for shareholders.

If I am not mistaken, a 5% or greater stake in a public company is subject to a 13D filing with the S.E.C., disclosing the owner. It could be Rockstar directly or a representative, or Rockstar could own its stake through several entities. We’ll have to wait and see how this plays out.

* * *

Both Spherix (SPEX) and Global Options Group (GLOI), which began trading on Monday after announcing a deal with the group that holds the Walker Digital patents, have been added to the IP CloseUp 30.

Pubic IP Companies, also known as PIPCOs, are an emerging trend with no fewer than 30 currently traded on U.S. and UK stock exchanges. (See IP CloseUp® 30, here, for a list.) Some believe these businesses are no more than non-practicing entities, NPEs, or to some patent “trolls,” re-purposed for better access to capital. Others believe that PIPCOs, some of which are operating businesses that sell products, are part of the inevitable evolution of IP rights as an asset class, and are a viable business model.

Will IP monetization companies whose shares are bought and sold on the public stock markets deter commerce, as some academics suggest, or will they serve as a catalyst for more and better innovation, and higher return on the R&D investment that underlies patents?

Regulatory Disclosure – Burden or Opportunity?

S.E.C. mandated disclosures will provide some transparency for public IP companies. They are an opportunity for all IP rights holders to put their intangible assets, amorphous at best, in a clearer business context. Hopefully, transparency will encourage other companies whose IP is an integral part of their particular value proposition to demonstrate more visibly the role it plays in generating return or protecting revenue and market share.

It has yet to be determined whether the investor public has the ability, or the access to the right information, to interpret complex legal developments, such as a favorable Markman hearing or a venue change in a patent litigation, and gauge their impact.

PIPCOs like Qualcomm and InterDigital have led the way, while businesses like RPX and Acacia have come up fast behind them, and still others, “micro caps” with market value typically under a few hundred million dollars, are bringing up the rear. The smallest players are most dramatically affected by a successful settlement or licensing agreement. They present the best opportunity for investor return, but they also are the most volatile.

* * *

Past speakers at GSU Hot Topics and Corporate IP Roundtable Annual Series have included Kevin Rivette, author of Rembrandts in the Attic,Marshall Phelps, former VP of IP Business and Strategy at IBM and Microsoft, and Judge Paul Michel, who served as the Chief Judge of the Court of Appeals for the Federal Circuit.

The 9th Annual IP “Hot Topics” luncheon will confront the public IP company question head on. For those interested IP Hot Topics is being held at the GSU Student Center on May 14, 2013 at 12 Noon. I look forward to seeing you there.

News aggregator serves up a convenient summary of developments in the public patent space.

Patent Stock Review, a news and analysis website started earlier this year, provides easy to access background on a wide range of public companies involved in patent monetization, including Vringo, VirnetX and Acacia, as well as many that are less well-known.

Published by Institutional Analyst, Inc.(AIA), an investment research firm founded in 1998 by Roland Rick Perry an editor, part-time analyst and investor communications consultant. Mr. Perry is responsible for launching the Internet Stock Review, and also provides coverage for companies in a number of distinct industries including, Biotech, Internet, Entertainment, Restaurants, Special Situations and Private Equity.

Patent Stock Review is not rocket science, but it is very useful. Like many good ideas, it compels a reader to ask, “Now, why didn’t I think of that?” With its evolving core Watch List, it is a well-timed addition to the public IP company (or PIPCO) information space. Particularly useful are the latest blog posts andmost popular blog posts,which provide insight into what people are saying.

“The Watch List, was created as a starting point for investors who are interested in companies involved in Patent Monetization via internally held patents, patent portfolios or through the acquisition of potentially valuable patents,” says Mr. Perry. “The list is not a buy list, but rather our universe of companies, whose technology, management, patent portfolio and/or recent market performance we currently find compelling.”

Mr. Perry started Institutional Analyst, the predecessor to IAI, in 1995. Earlier in his career he was a broker at Drexel Burnham Lambert. While most of the companies he updates are not his clients, Mr. Perry says that to align IAI’s with shareholders, he “seeks to have 90% of clients’ retainer represented by an equity stake.” The Patent Stock Review is a wholly owned subsidiary of a public relations firm Institutional Analyst Inc. (IAI), which provides or creates coverage for publicly traded companies.

Voyage of Discovery

“The impetus behind the Watch List issuance is to bring attention to the names and/or to the existence of these companies, particularly those with no coverage on Wall Street,” continues Mr. Perry, “and then to have the investors themselves, do the due diligence necessary to decide on their own if any of the companies warrant further study and/or investment.”

The website provides individual news feeds for each company on the Watch List, enabling investors to easily follow the entire group with a single visit. Through Thomson Financial, the Patent Stock Review’s hard copy research reports are made available to more than 22,000 institutional money management firms and over 950 research firms including brokers, investment banks and independent research firms.

IP-centric businesses whose shares trade on the public markets come in many shapes and sizes — some are better suited for return than others.

Many of the most interesting IP-rich businesses, from an investor perspective, are publicly traded, thinly capitalized companies with experienced management. The best have a realistic view of their IP assets, usually patents, and the timing and cost of their disputes and value of potential licenses.

The emergence of public IP-rich companies (PIPCOs) whose shares trade on the global exchanges is presenting new opportunities for patent holders and investors alike. They are the subject of the next (March) Intangible Investor, “PIPCOs – A Business Model Whose Time Has Come,” due out in IAM next week.

Pure-play licensing businesses, non-practicing patent licensing companies with a single method of generating return, are being challenged by business models that provide more options and potentially greater return. Through self-generation, acquisition or merger with complimentary operating units, publicly held licensing companies are emerging as businesses that are more readily understood by investors, able to access the capital markets, and acceptable to the courts.

Global Interest

At last count, there are no fewer than 25 companies that trade on US, UK and Canadian stock exchanges that include among their primary goals direct patent monetization. As recently at 18 months ago they would all be considered NPEs. Today, only a few are licensing-only pure-plays. The mix now includes enforcement businesses that support inventors and SMEs; licensing businesses that conduct proprietary R&D and obtain patents through filings; and those sometimes called profiteers that acquire rights from others, including operating companies that stand to profit.

More public IP businesses today are a combination of models that include smaller, under-capitalized operating companies that are selling products or attempting to commercialize them. While the patent monetization business makes good sense, it is not for every holder or investor.

With the exception of Qualcomm, Acacia, InterDigital and VirnetX, all with billion dollar plus valuations, public IP companies tend to be companies whose value is under about $500m. Mosaid, Tessera, Rambus and WiLAN comprise the next tier, between $500m and $1b. The remaining 17 companies are what Wall Street calls micro-caps.

They include Vringo andDocument Securities Systems, DSS, an anti-fraud and brand protection business with patents and trade secrets which has announced a merger with patent monetization firm, Lexington Technology Group. LTG (which BBA advises) is headed by IP veterans Jeff Ronaldi , who has run successful technology and monetization businesses, and Peter Hardigan, formerly director of investment management at IP Navigation Group and a Principal heading IP transactions atCharles River Associates. Warren Hurwitz, co-founder with Rob Kramer of Allied Security Trust, a successful IP private equity fund which has sold a $46 million portfolio to RPX, recently joined LTG as a director. The merger is set to close late 1Q.

Defensive-minded patent-rich companies, like Microsoft, IBM and Samsung, arguably are also PIPCOs, although their lofty market cap and abundant revenue streams make their shares less dependent on the outcome of IP disputes. The lack of broad ownership of smaller PIPCOs means that they are frequently misunderstood and their shares are sensitive to news, good and bad.

For stoic investors looking to take advantage of still inefficient market for generating a return on infringed patents, PIPCOs may be an option whose time has come.

For the latest news on patent licensing companies click below:

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About Bruce Berman

I'm a long-time intellectual property observer, adviser and editor, who is in close close contact with the leading holders and most influential people. I track the latest trends and developments, and monitor patent and other IP transactions, strategy and performance.

Since 1988 I have been working with IP holders, managers, lawyers and investors to properly explain the importance of their assets to key audiences, frame disputes and convey transactions.

My five books, including the IP best-seller FROM IDEAS TO ASSETS, deal with IP rights as business assets. THE INTANGIBLE INVESTOR, the column I have been writing for IAM Magazine since 2003, looks at ways IP rights impact stakeholders. For my complete bio visit www.brodyberman.com or click on the link below.